Ratings Reveal A Bond's Safety, Risk
How to build a bond ladder, commission-free, with help from Uncle Sam.
Q I am somewhat confused about bond ratings. One company uses large letters, another company uses small letters. Are the ratings the same?
- R.O., New York
A One key to buying a bond is its "quality," which is largely defined by its credit rating, says a spokesman for John Nuveen & Co., a Chicago firm known for bond mutual funds. The two main bond-rating outfits are Standard & Poor's Corp. and Moody's Investors Service. Their designations are somewhat similar: S&P stamps AAA, AA, and A, on its top-graded bonds; Moody's uses Aaa, Aa, and A. Bonds graded AAA and Aaa are considered the very best.
Many conservative investors will not buy anything below a double-A rating. Below BBB (S&P) and Baa (Moody's), bonds are designated "junk" for their greater risk of default. Junk bonds lure buyers with higher yields.
US Treasury issues are rated AAA.
Bonds can be sold before maturity by a broker or bank. But you must pay a commission. And whether you make a profit will depend on prevailing market conditions.
Q Please describe how an individual can buy Treasury bonds and construct a laddered portfolio.
- S.S., Boston
A The concept of a bond ladder is discussed on Page B5. To build a portfolio of Treasury securities without paying broker commissions, call Treasury Direct at (212) 874-4000.
Also, a Web site (www.publicdebt.treas.gov) has information on coming debt issues, plus forms that can be downloaded to you. In the future, you'll be able to order securities over the Internet, a Treasury spokesman says.
To buy a security, first open an account. Ask for a new account form. To buy a specific issue, you must send in a "tender" form, along with a certified check or an authorization to debit your bank account. You will not receive a certificate; the account is electronic.
You can also buy bonds from a broker or bank. Since they charge fees, brokers are usually recommended only if you place very large orders, say, more than $100,000, or plan to sell bonds before maturity.
Treasury Direct can help you sell a bond early, but there is a fee of $34.
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